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Importance of Risk Management in Cryptocurrency Trading

cryptocurrency trading

One of the most associated words with cryptocurrency trading is “Risk”. It is needless to say that the extent of volatility attached with trading these virtual currencies is much higher. Every tradable asset has risk allied to it but we can say a comparatively lesser than the cryptocurrency.

But as goes the saying, “Higher the risk, higher the returns.” So, the traders do take the risks and plan preventive measures to enjoy a handsome profit. Even luck is important and obviously dependent on the market conditions. Hence, trading with utmost safety can also sometimes lead to a chronic failure.

Each trader in the cryptocurrency community has varied level and source of knowledge. Consequently, he/she would think and execute in a different way. Some may take adverse decisions under an emotional state of mind and while some may get trap under false breakouts. Avoiding or overcoming such situations is also a part of risk management.

Consider a scenario, where a trader X has done extensive research in the field of cryptocurrency trading and thus possess an in-depth knowledge. This will help him to frame trading strategies to avoid risks as much as possible. Then there is a trader Y, with lack of knowledge who makes a potential profit by making some random moves in the Bull Run. Consequently, he thinks that educating himself about the cryptocurrency market, trading tactics or risks involved is not necessary. Then the market takes a bearish turn and trader Y suffered massive loss as he was not aware of the sudden change and had no precautions taken. However, trader X saved himself from affecting under the bearish run due to his risk management strategy.



From the above-mentioned example, you can derive a point that even though the trader X did not achieve profits as high as trader Y during the Bull run but during bear’s hug, trader X was at a safe position because he sensed the situation earlier and set his trades to avoid the risks and in turn prevent the loss.

This example clearly states the importance of risk management in cryptocurrency trading. In addition, knowledge is equally important, as it will only help the trader to frame risk preventive strategies. Once bearing a huge loss will scare the trader from entering the crypto market again. While people like trader X will continue the long-term trading journey.

How do traders manage the risk?

As stated earlier, each trader has a different set of experience, knowledge and exposure. Thus, the thinking ability/capacity of each one of them is not the same. Henceforth, the technique to manage risk would be different as well.

In a survey conducted by Encrybit, the traders answered the question, “How do you manage your Risk while entering in the Trade?” The question had three options available for multiple selection.

  • Plan your trade before execution
  • Calculate proper stop loss based on recent high and low
  • Based on your account size and trading personality
  • In response to these given options, 45% of the traders selected all the three options. This indicates that half of the traders look after every given option to manage risk. Planning of trade, calculation of stop loss and consideration of one’s account size and trading personality, all three of them are important to manage risk while entering the trade.

Is risk management=success?  

The same question when asked to the traders, 71% of them said yes. It is a huge number complying with the fact that if you manage the risk wisely then success is at your doorstep. Maybe because they have experienced the same or have heard something similar due to which they have chosen yes.

However, it is not true always. Risk management is surely one pathway to success but not equal to success. The success in cryptocurrency trading also relates to market analysis, technical and fundamental analysis of the coins along with their trading pattern. Staying up-to-date with the latest happenings in the cryptocurrency world and not making decisions under emotional sentiments are also necessary.

The bottom line

All these facts indicate that risk management in cryptocurrency trading is surely important. Given that, carried out in a right manner. Moreover, it will be wrong to focus simply on risk management altogether. There are many other aspects of cryptocurrency trading which deserves equal importance along with risk management to gain maximum ROI.

 

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